>>International trade is the concept of exchange between people or entities in d

Question

>>International trade is the concept of exchange between people or entities in different countries. Theories which are referred to as modern are firm-, or company-, based. Mercantilism was one of the earliest efforts to develop an economic theory. The belief is that trade generates wealth and is stimulated by the accumulation if profitable balances, which a government should encourage by means of protectionism. What is wrong with this theory in today's world of Business? Are there better forms of trade?

>>Using Porter’s four determinants of competitive advantage, describe how a business may use the trade theories to develop its business strategies.

>>Why is it important to understand political and legal factors of countries that you want to deal with when trading internationally?

>>What are three factors that impact a company’s decision to invest in a country? What is the difference between vertical and horizontal FDI? Give one example of an industry for each type. How can governments encourage or discourage FDI?

>>Identify at least two ways culture can impact a Business. Be specific and PROVIDE EXAMPLES. Explain some of the challenges that could materialize (i.e. decision -making, negotiating, etc.) and generate some ideas on how you would help to resolve the problem in specific ways.

Explanation / Answer

Mercantilism was one of the earliest efforts to develop an economic theory. The belief is that trade generates wealth and is stimulated by the accumulation if profitable balances, which a government should encourage by means of protectionism. What is wrong with this theory in today's world of Business? Are there better forms of trade?

Mercantilist concept was developed from the rise of powerful nations such as Spain, France, and England who was almost always in constant warfare, because of this money was needed to support the armies. The idea was that if one nation wanted to become richer another nation would have to become poor. Right now for example the products that the U.S produces cost more than Vietnam or China because of not only higher wages but a higher cost of living as well. When countries such as Vietnam and China have lower living standards and lower costs associated with this their labor wages are also lower as well. In todays world this concept would not work because of Free Markets and Capitalism. Each country has an advantage in producing certain things, so by trading between different countries you are producing more overall and have a better economic flow. If a country is only producing what it needs then it has no money coming from trade and also may not be able to get needed products from trade either. A country doesn’t have to trade with another country such as the U.S; this doesn’t stop the country from trading with someone else though. Protectionism encourages exports to other counties and then also puts (monetary) restrictions on imports. If something like a tariff or another form of tax was added it would increase the cost and depending on the product and the country, they may not be willing to pay more for that specific product (Rothbard, M. N.).

Mercantilism is the opposite of the theory of free trade. The free trade theory is imposed through tariffs and fair free trade reduction which is believed to improve the countries economic well being. With mercantilism the government would regulate the trade and the economy to help only that country domestically. An example of Free trade would be the agreement between the U.S., Mexico, and Canada in this trade agreement all the barriers between the countries are removed as well as the tariffs. This trade agreement is called North America Free Trade Agreement or NAFTA. The problem the counties are seeing with this arrangement is exploitation of lower paying wages and environmental restrictions being of lower standards in Mexico than in the U.S. Many feel this sort of trade agreement is taking away jobs from our country. Free Trade is still more preferable than mercantilism, but countries such as the U.S may need to impose tariffs for counties who are not in this agreement such as Chine, due to the way in which they manipulate currency(What Does NAFTA Do?).

Using Porter’s four determinants of competitive advantage, describe how a business may use the trade theories to develop its business strategies.

Porter’s determinants four competitive advantages are:

Why is it important to understand political and legal factors of countries that you want to deal with when trading internationally?

It is important to understand the political and legal factors of a country when trading internationally because despite globalization a company must abide by the laws/regulations in which the local country has and in which they would be operating their company in, this includes religious law, criminal law, civil law and common law. The most direct impact on business can be observed in Islamic law—which is a moral, rather than a commercial, legal system. A company may also want to assess the political risk and stability of a country as well. Political stability is a key factor in attracting foreign investments as well. An example of laws and regulations could be the amount of a harmful materials used in products, the U.S would have more strict laws because of the laws set forth by the environmental protection agency than say someplace like China. Certain countries such as dictatorships in terms of politics may control the commodities in which are of large economic interest. If a new technology company for instance wanted a more “free” type of country they may choose the U.S because it’s a democracy. Businesses need to assess if a country believes in free markets, government control, or heavy intervention in the industry. As you might expect, established democracies, such as the United States, Canada, Western Europe, and Japan offer a high level of political stability. Countries like Asia and Latin America also are functioning democracies; their stage of development impacts the stability of their economic and trade policy, which can fluctuate with government changes(Political Environment in International Business).

What are three factors that impact a company’s decision to invest in a country?

The three factors that would impact countries decisions to invest in another country would be the cost, whether or not it would be more or less expensive to produce in another country. The impact would be another factor, referring to the impact of how it would affect the company’s profits, demands, and things of that nature. The third would be the logistics, meaning could they move the product, or the transportation cost being prohibitive for the environment they would be in. Political factors as mentioned above affect the choices of investing in certain countries as well due to the economic stability of those countries(Political Environment in International Business).

What is the difference between vertical and horizontal FDI? Give one example of an industry for each type. How can governments encourage or discourage FDI?

Horizontal FDI refers to the type of direct investment between industrialized countries as ways to avoid trade barriers such as tariffs and import quotas, gain better access to the local economy, or draw on technical expertise in the area by locating near other established firms. An American direct investment in Europe is the acquisition of Jaguar and Volvo by Ford Motor Company in 1989 and 1999 is a horizontal FDI example.

Vertical FDI, occurs when a firm in an industrial country builds or purchases a plant in a developing country. The key advantage/objective of establishing a plant in a developing country is to lower production cost by hiring low-wage workers and using low-cost materials. The United States and Europe have a direct investment stock of around $151 and $130 billion, in the rest of Asia (which excludes Japan). These stocks are an example of vertical FDI. An industry such as Apple components would be another example.

Governments encourage FDI by offering incentives such as financial incentives, job training, or tax breaks to companies to create jobs, and increase technology. A government may discourage FDI to protect natural resources, restrict who owns the business, or impose taxes, tariffs, and laws(Carpenter, M. &Dunung, S.P)

Identify at least two ways culture can impact a Business. Be specific and PROVIDE EXAMPLES. Explain some of the challenges that could materialize (i.e. decision -making, negotiating, etc.) and generate some ideas on how you would help to resolve the problem in specific ways.

1) Business protocol – how to greet and interact with a person from a foreign country. Different cultures have different ways of greeting one another. In the United States, we tend to shake hands with one another. According to the website ExecRanks, (2017) one must do research when visiting another country to determine if you are to shake the hand of a woman, especially in an Arab country, gently shake the hand of a Japanese individual, or shake hands in a hierarchy of either age or management position. There are cultures such as Russians, United Arab Emirates and Saudi Arabians that may kiss guests on each cheek. This custom is best not initiated by yourself. Asians prefer to bow, and it is necessary to bow back, or one is considered rude. Those who are lower in rank must bow first and lowest. India natives may use a greeting such as the Namaste that involves hands and a nod. There are online resources, and discussion with fellow coworkers and management who have interacted with different cultures than can provide education as how you are to greet and interact with a person from another country.

2) Marketing, sales and distribution – The culture of a country can affect the sales of a product. To market a product, a company must go to the area, speak to people of that culture, and get their feedback on that product. Sales presentations must be customized. If the sales pitch is to a country in which English is a second language, it would be beneficial to have an employee that either speaks that language or has some knowledge of the language. Distribution is easier if a company collaborates with local distributors to discuss the cultural norms of that area. Check the product name for possible translation snafus.

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